A nominal anchor is a commitment to keep nominal variables within limits, often tied to an external value or price. When nations do not incorporate such discipline into their monetary policy, exchange rates are often:
A) irrelevant to economic activity.
B) extremely volatile, because traders consider monetary shocks to be permanent.
C) less dependent on monetary variables.
D) determined by political considerations rather than economic fundamentals.

Question

Quizplus · Accepted Answer

Without a nominal anchor, traders may consider monetary shocks to be permanent, causing extreme volatility in exchange rates. The other options are not necessarily true.

A Nominal Anchor Is a Commitment to Keep Nominal Variables